By Dilip Parmar
The dollar has been on a tear this year, with the US dollar index reaching the highest level in two decades while the rupee has been hovering near the eighties. There is a long list of drivers behind the recent surge in the greenback some of them are hawkish central banks especially the Federal Reserve, recession fears, foreign fund outflows, higher commodity prices and rising risk aversions. In the near term, the rupee could consolidate in the range of 79 to 80.50 while the dollar strength will continue against developed market currencies. We believe, the rupee could decouple the regional currencies amid higher growth prospectus, improving high-frequency data, better monsoon and foreign institutions turning net buyers in the last couple of months.
Inflation in India is hovering near 7%, after touching 7.80% in April while in the US it is hovering near multi decade highs which are pressuring the Central Bank to continue to tighten policy. The market is pricing in 70-80 basis points of an additional hike from RBI this year and peaking out in Q1 2023.
The rupee has been one of the strongest currencies since July after foreign institutions turned net buyers of domestic equities and debts. We believe the interest differential and positive carry will continue to attract foreign fund inflows to India. The inflation might come under the tolerance range of RBI in the coming month following above-average monsoon rainfall and lower global commodity prices. The growth momentum can see an upswing in the coming months as festive demands will start from next week.
In the quarter to date, foreign institutions have poured $8.18 billion in equities and $1.21 billion in debts. The market participants are also waiting for MSCI’s decision on India’s bond inclusion in the global bond index which is expected to bring in estimated inflows of $30-40 billion. In the near term, spot USDINR is expected to trade in the range of 79 to 81 as a stronger dollar will push it higher while foreign fund inflows will limit the upside. The medium-term trend remains bullish in spot USDINR as long as it trades above 78.70.
(Dilip Parmar, Research Analyst, HDFC Securities. Views expressed are the author’s own.)